Arm's Length Banking and Firm Innovation: Evidence from Korea
27 Pages Posted: 4 May 2020
Date Written: April 8, 2020
This study explores the effect of bank loans subdivided in arm’s length banking and relational banking on innovation of Korean listed firms. I find that bank loans from relational banking negatively affect firm innovation whereas those from arm’s length banking positively affect it. This finding implies that diverse opinions among banks may increase the probability of financing for innovation. This finding also remains robust in Tobit, Poisson, and negative binomial regressions, in using reconstructed sample by a propensity score matching, and in two-stage regressions using an instrumental variable. This finding also occurs both in high technology and non-high technology firms. However, I find no significant relationship between bank loans and innovation of Chaebol firms. This study provides managers or academic researchers with valuable implications for an appropriate bank-firm relationship for promoting firm innovation.
Keywords: Bank loans, Bank-firm relationship, Arm’s length banking, Relational banking, Firm innovation
JEL Classification: G21, O32
Suggested Citation: Suggested Citation